The 10 Most Common Wage-And-Hour Issues – Part 1

By Kristy Albrecht and Beth AlvinePhotos courtesy of Fredrikson & Byron Law Firm

Compliance with federal and state wage-and-hour requirements can be confusing, and getting it wrong often leads to costly mistakes and expensive lawsuits. Indeed, the number of wage and hour lawsuits has skyrocketed over the past decade, and wage-and-hour mistakes are the largest uninsured risk facing employers today.

What do we mean when referring to wage-and-hour requirements? We are talking about the body of law that establishes and regulates wage standards for employees, including, but not limited to, minimum wage and overtime regulations.

The federal and state laws governing wage-and-hour issues, including the Fair Labor Standards Act (FLSA), are complex, highly regulated and sometimes counterintuitive. Moreover, one disgruntled employee and one small, technical mistake can result in a class-action wage-and-hour lawsuit against an employer. In our practice, we work with employers on a daily basis on personnel matters and wage-and-hour compliance. Over time, we have seen that even the best-intentioned employers can make critical errors on employee pay, and those errors may have an expensive price tag.

This article is the first in a two-part series addressing the 10 most common wage-and-hour mistakes we see in our practice and offers advice on how to avoid these costly errors. In the next installment, we will discuss rest breaks and meal periods, travel time, on-call pay, tracking hours worked and internships.

1. Misclassifying Employees as Independent Contractors

The FLSA applies to “employees.” It may seem intuitively obvious which workers are “employees” and which are not. However, “employee” is a term that has been a subject of significant legal debate.

Some businesses have tried to reduce costs and risks by hiring independent contractors instead of employees. True independent contractors are not subject to the FLSA and are not subject to various withholding requirements such as state and federal income taxes and unemployment and workers’ compensation withholding. The business and the contractor will usually have a written independent contractor agreement in place, and some businesses erroneously believe that the written agreement offers complete liability protection.

It may seem intuitively obvious which workers are “employees” and which are not. However, “employee” is a term that has been a subject of significant legal debate.

In reality, the agreement itself is not a bulletproof shield, and it does not make the worker an independent contractor.

The specific standards for the independent-contractor classification vary slightly under the different areas of employment law. As a general matter, however, what matters is how much control the employer has over the worker’s activities, how the relationship is structured and how dependent the worker is on the employer. A written agreement is helpful proof as to the relationship, but it is not determinative.

The bottom line is that an independent-contractor classification error is costly, and businesses should seek legal counsel when considering this classification.

2. Misclassifying Non-Exempt Employees as Exempt

Another common employee classification error is improperly classifying a non-exempt employee as exempt. The FLSA makes a distinction between employees who are “exempt” from the overtime pay requirements and those who are not. Employees are legally presumed to be “non-exempt.” That is, they are entitled to overtime pay for time worked more than 40 hours in a week. To be exempt from overtime, an employee must fit within one of the specific exemptions set forth under the FLSA.

The most commonly used exemptions are the “white collar” exemptions, which involve both salary and duties standards. Many employers wrongly assume that if an employee is paid on a salary basis, he or she is exempt from the overtime requirements. That can be a costly mistake. All of the requirements for an exemption must be satisfied.

Many employers wrongly assume that if an employee is paid on a salary basis, he or she is exempt from the overtime requirements.

While the white-collar exemptions include a requirement that the employee be paid on a salary basis, each of those exemptions has very specific duties tests. Importantly, the application of the duties tests to a particular job frequently requires some research into the regulations and interpretive case-law to find out how the Department of Labor and the courts have viewed similar positions. A salaried employee whose position does not satisfy the applicable duties test is not exempt from overtime.

Like the independent contractor classification error, an exempt classification error can be costly and requires careful analysis to prevent misclassification mistakes.

3. Failing to Pay Overtime on a Non-Discretionary Bonus

Most employers know that non-exempt employees are entitled to overtime pay at 1.5 times their regular rate of pay. Many employers forget, however, that a non-discretionary bonus must be included in the regular rate of pay to calculate any overtime owed.

Non-discretionary bonuses are typically bonuses that an employer offers and that the employee has come to recognize and expects to receive. Non-discretionary bonuses are often tied to production or other benchmarks, and the bonus is promised if the employee meets certain work standards. These bonuses must be included as part of the base rate of pay in calculating an employee’s overtime.

A non-discretionary bonus must be included in the regular rate of pay to calculate any overtime owed

For example, if an employee is paid a base rate of $10 per hour, the overtime rate would be $15 per hour. If, however, the employer has an incentive-bonus program in place and the employee receives another $6 per hour in incentive pay, the employee must be paid overtime at the rate 1.5 times the total hourly rate ($10 + $6), which would be an overtime rate of $24 per hour.

Only true discretionary bonuses — where the employer retains full discretion on whether to award the bonus and, if so, how much to award — may be excluded from the regular rate of pay.

4. Final Pay Errors

One of the most common wage-and-hour mistakes is making improper deductions and failing to pay an employee all compensation owed in the employee’s final paycheck. An improper deduction or final-pay error can result in significant penalties.

North Dakota law requires all earned vacation and PTO to be paid to an employee upon separation unless a set of specific conditions are met.

When an employee is terminated or resigns, an employer may want to make deductions for unreturned company property and/or damage to company property. If these deductions are not authorized in writing by the employee at the time of the deduction, the deductions are improper under North Dakota law.

Another mistake on final pay is not paying out earned and unused vacation or paid time off (PTO). North Dakota law requires all earned vacation and PTO to be paid to an employee upon separation unless a set of specific conditions are met. Specifically, the employer must have provided written notice of the vacation and PTO withholding policy to the employee at the time of hiring, the employee must have been employed for less than one year, and the employee must have given the employer less than five days written notice of the employee’s resignation.

5. Failing to Compensate Employees for Time Spent in Training

As a general rule, employees must be compensated for the time they spend attending training or meetings. Training time must be paid unless all the following conditions are met:

Attendance is outside the employee’s regular working hours

Attendance is voluntary

The meeting or training is not job-related

The employee does not perform any productive work during the training.

Remember, especially with wage-and-hour compliance matters, working with your legal counsel and getting the details correct on the front end will often prevent expensive litigation and penalties.

About the Authors

Kristy Albrecht is a shareholder and member of the employment and labor, litigation, transportation and appellate groups with Fredrikson & Byron Law Firm in Fargo. She advises employers on a variety of employment law issues, including hiring, firing, discipline, employee leave and accommodation laws, employee handbooks, drug and alcohol policies, and separation agreements.

Beth Alvine is an associate with Fredrikson & Byron and a member of the employment and labor and business-advisory-services groups. She advises and represents employers on employment and labor issues, including terminations, wage-and-hour compliance, drug-and-alcohol testing and policies, employee leave and accommodation strategies, and employer programs and policies.

Watch for the second installment of this article in the April issue of Fargo INC!, where we will round out our top 10 wage-and-hour mistakes and discuss rest breaks and meal periods, travel time, on-call pay, tracking hours worked and internships.

Fredrikson & Byron Law Firm will be offering a half-day wage-and-hour seminar at the Holiday Inn Fargo on Thursday, April 19. Visit FredLaw.com/WageAndHour for details.

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Fredrikson & Byron’s 277 attorneys serve clients in more than 30 practice and industry areas in seven offices in the US, China and Mexico. Fredrikson has built a reputation as the firm “where law and business meet” by bringing business acumen and entrepreneurial thinking to its work with clients, and by operating as business advisors and strategic partners as well as legal counselors.